One of the most frequent questions I receive is: How can I implement your in-vestment recommendations through my 401(k) plan? A related question is whether a reader should keep assets at the 401(k) plan when leaving an employer or roll over the assets to an IRA.
The sad fact is that most 401(k) plans aren’t very good. They tend to be designed by human resources personnel or business owners, not by investment professionals. They also try to be safe and conventional. Often, the plan is designed based on what’s best for the employer, and that usually means using a single provider for recordkeeping, employee education, and investment options. Too many plans still offer only mutual funds from one family or company.
Even the plans that offer funds from different families often offer poor or limited choices. Employees can’t find funds in each asset class or strategy. Many employers select funds because they are well-known. The trend in recent years is to offer primarily index funds and focus on low fees.
In short, many of the funds I recommend aren’t available in the typical 401(k) plan nor are good alternatives.
Many 401(k) plans, however, do offer a good option. It’s known is the business as the brokerage window. Your plan, if it has one, probably uses a different name such as self-directed brokerage account and might even hide the option. But it’s a good option for the serious investor with a lot of money in a 401(k) account.
The brokerage window allows plan members to bypass the plan’s fund options, open an account through their 401(k) plan at a broker selected by the employer, and invest in most available assets. It’s a brokerage account within your 401(k) plan.
Employers generally limit the choices avail-able through the brokerage window, but not nearly as severely as the plan’s standard offerings. Most plans allow members in the brokerage window to invest in almost any mutual fund, ETF, stock, and bond available through the broker. Some plans even allow members to invest in options or sell short stocks. The windows usually allow online investing and trading at any time that regular investors can trade. With a plan’s standard investments, there often are limits on the amount of trades and the times at which changes can be made.
If your 401(k) offers a brokerage window, you probably can invest in my recommended portfolios without much trouble.
Using a brokerage window is not free. There usually is an annual fee of $100 or less. There also are likely to be trading fees on each transaction you make in the portfolio, though there might not be a fee for using no-transaction-fee funds. The funds available through the window also aren’t likely to be the institutional share classes available through in-plan funds, so you’re likely to pay higher annual expenses in the funds.
Investment of your regular contributions also is an issue. Will the plan administrator or broker automatically allocate them in a way you pre-select? Or do you have to manually make the investments each month? Is there a fee each time?
Read the 401(k) plan’s materials to be sure you know all the fees.
Some employers don’t want to offer a brokerage window or put tight restrictions on it. They’re concerned about legal liability. They don’t want employees who make bad investments suing them for making the poor decisions possible. Others are concerned about the government. The Department of Labor in 2012 floated the idea of making employers responsible for any investment selected by 1% or more of its plan participants. For now, the proposal is withdrawn.
The 401(k) plan brokerage window is not for everyone. If you want a traditional portfolio and your plan offers decent funds, stay within the standard plan. But if you want to duplicate my recommended portfolios or the plan offers low-quality or high-expense funds, take a look at your plan’s window. When your plan doesn’t have a brokerage window, tell it you’re interested in one.
RW March 2013.
Log In
Forgot Password
Search